AP Microeconomics

Warm Up: On a ½ sheet I am collecting for a grade 5 minutes after bell rings!!

1. Illustrate a side-by-side perfectly competitive labor market.

a. Identify both the market and firm’s price and quantity for labor.

b. On the same graph illustrate and then explain the effect a plague would have on this market and the number of workers the firm would employ.

=

The Key Efficiency Condition: Price Equals Marginal Cost

If PX > MCX, society gains value by producing more X.If PX < MCX, society gains value by producing less X.

The value placed on good X by society through the market, or the social value of a marginal unit of X.

PXMCX

Market-determined value of resources needed to produce a marginal unit of X. This is equal to the opportunity cost of those resources: lost production of other goods or the value of the resources left unemployed (leisure time).

FIRMS HOUSEHOLDS

Goal: Maximize Profits!!

Goal: Maximize Utility!!

MRPL MRCL Labor Leisure

Efficiency in Perfect Competition

Follows from a weighing of values by both households and firm

The Market in Perfect CompetitionWe have been learning about individual

markets in perfect competition. This is the ideal situation where we can apply certain economic rules:

1. _____________________ and _____________________ in the industry (market) determine price for each individual firm.

2. Therefore the firms are Price - ___________________

SupplyDemand

Takers

The Market in Perfect Competition

3. All firms will maximize profits in both the short and long run when:

Output Market Input Market

4.Markets want to be at ___________________; and will work hard (sometimes even against _________________________ forces) to be there.

Equilibrium

Government

MC = MR

PX = MR

MRC = MRP

PL = MRPL

Marginal RESOURCE Cost

Analysis in Perfect Competition

• When economists study the market and how the forces of supply and demand shift the equilibrium price and quantity of one market they are doing _______________________________________.

• However, that would be just looking at the little picture. Economists need to study further how markets affect one another; more specifically, they need to study all markets and how they achieve equilibrium together. This is the ___________________________, when all markets will find equilibrium.

Partial Equilibrium Analysis

General Equilibrium

One Market:

• The U.S. government deports all illegal immigrants. How will this affect the citrus industry? What changes will occur in price and quantity?

This one market change will affect other markets!! It will hurt some industries and help others. List three of each; be able to

explain your answers:

• Industries Hurt:

1.

2.

3.

• Industries Helped:

1.

2.

3.

General Equilibrium

• However, the General Equilibrium is constantly changing because markets that are neither substitutes nor complements to one another can still have an effect on each other!! For example, I will buy fruit juices still even if prices are increased because of the above stated government policy. However if my income doesn’t change, I must then sacrifice spending elsewhere because I have less money to spend (so no new shoes)!! So a strike in the citrus industry leads to me buying less shoes!!!

This final observation leads to the:

• Pareto Efficiency (Pareto Optimality):

• A condition in which no change is possible that will make some members of society better off without making some other members of society worse off.

Pareto Efficiency

• If an economic system is Pareto efficient, then it is the case that no individual can be made better off without another being made worse off. It is commonly accepted that outcomes that are not Pareto efficient are to be avoided, and therefore Pareto efficiency is an important criterion for evaluating economic systems and political policies.

Pareto Efficiency

• If economic allocation in any system is not Pareto efficient, there is potential for a Pareto improvement, an increase in its efficiency through reallocation, improvements to at least one participant’s well-being can be made without reducing any other participant’s well-being. A change is said to be efficient if it makes some members of society better off without making other members of society worse off. An efficient, or Pareto optimal, system is one in which no such changes are possible. However we must weigh the gains and the losses; a decision is then efficient if the gains are greater than the losses.

Real World Application:

#1: Why does the government collect taxes?

• So therefore, when taxes are cut, we can assume that…

• Non-essential services are always the first to be cut. So citizens of a local area are pleased to see that taxes were cut for this fiscal year. However, in return for this tax cut, clerical positions at the DMV were also cut. Therefore, citizens have to wait in much longer lines in order to do business.

Real World Application:

• The average wait time was ninety minutes

• It was calculated that to reinstate the clerks each tax payer would need to increase their yearly taxes by $2.00.– Who would gain by this decision?– Who would lose by this decision?– Does the gain outweigh the loss making it a

Pareto-efficient change? Explain.

#2: USA vs. Microsoft

• In the year 2000 a federal judge ordered that Microsoft be split into two separate companies because it had violated the antitrust laws of the United States. Some argue that the antitrust laws are justified on the grounds of the efficiency of competition. That is, breaking up a monopoly should result in a Pareto-efficiency change. This cannot be so because breaking up Microsoft clearly makes its shareholders worse off. Do you agree or disagree? Explain